Earnings continued to roll in which combined with higher dividends in many cases continued to support stock prices.
As the charts above illustrate, the Dow Jones Industrial Average was slightly lower last week while the NASDAQ Composite gained modestly on renewed hopes that Apple might raise their dividend or otherwise engage in some financial engineerin g
of one kind or another.
The Markets & Economy
The Blizzard of 2013 has slowed down action on Wall Street both on Friday of last week and again this morning. In fact this morning feels like a Saturday despite the market being open for business.
The debate amongst economists has now focused upon whether or not the global economy is once again slowing down. Concern over the return of the FICA SocialSecurity Tax as well as all of the new Obamacare taxes and higher income taxes is also causing some trepidation. On top of this Washington has become petrified of the upcoming sequestration of federal government spending which is due to take effect on March 1st.
I will be brief on sequestration. President Obama came up with this idea eighteen months ago and recently threatened to veto any attempt to change its terms. However, just last week as it became clear it would happen, the President changed his mind and proposed a short-term stop gap measure, which of course includes more taxes.
This will not happen. Let me clarify one other item. Sequestration is often said to be an automatic cut in federal government spending. Remember the word cut in Washington DC does NOT mean a decrease in spending. It only means a reduction from the existing estimate in GROWTH of future spending.
Can you imagine that all of Washington DC is apoplectic because spending is not going to increase as much as they once thought it was? Sad does not even begin to cover what I think of this.
The next couple of weeks should include many days of dire warnings from government officials trying to scare the American public into thinking this situation is the end of the Republic. How many financial crises can we have in this Country back to back before one starts to think the administration is governing by intimidation?
What to Expect This Week
Sadly, the President is giving the State of the Union address tomorrow night which will have no long lasting importance, but will color the economic discussion for the rest of the week. No doubt it will include many warnings of what a “cut” in federal spending might do. If it wasn’t part of my job, I wouldn’t waste my time watching.
The economic news is light this week with industrial production due on Friday, and that’s about it. The economy is not doing well and Europe is doing worse. Higher taxes and less fiscal (but still enormous) stimulus cause me to worry about the global economy, especially in light of the strong rally we have seen in sto cks.
The weekly update though from the Economic Cycle Research Institute (see next page charts) shows no indication that there are any immediate problems. Thus baring a global shock of some sort (say Egypt turning into a lawless ally of Iran), then another year of lackluster GDP growth awaits us which means stocks, especially dividend payers, will do better than most other asset classes.
Next Monday the markets will be closed for the federal holiday of President’s Day.
Our next report then will be two weeks from today.
SYMBOL: SE
Spectra Energy reported fourth-quarter earnings last week that were slightly below Wall Street’s expectations. Revenues fell 6 percent to $1.35 billion, as lower commodity prices hurt the top-line growth. The Company still earned $0.32 per share, which was in-line with consensus estimates. Even though the revenue number was a little light, the shares rallied sharply on this report as some investors were expecting worse results
.
Lower commodity prices continue to hurt the Company, but the assets the Company has obtained are still extremely valuable. The operations in Western Canada have been a drag on earnings, but management was very positive about that region on the conference call with investors. We expect to see higher commodity prices, as governments around the world continue to print more money.
We are encouraged by the price movement of Spectra following these results, and there have been some takeover rumors in the market recently. The shares have an extremely conservative valuation, and are still yielding more than 4 percent. Spectra remain a core holding for all of our clients, and we believe the shares will reach $36 within the next 12 months.
Three-Month Chart
SYMBOL: AKAM
Akamai reported a mixed fourth-quarter earnings report last week, and management brought down guidance for the next several quarters. The Company beat earnings per share estimates, by a couple of pennies, but revenues were slightly lower than Wall Street was expecting. The new CEO Tom Leighton also brought down revenue guidance, and predicts the Company will be spending more on research and development over the next year.
We have gone through these spending cycles in Akamai before, and the share price has always recovered within the next 6 months. We look for the Company to make some acquisitions in these next six months, as the management looks for growth in other areas. The bottom line was hit by a sharp reduction in government spending, which should recover as our government hopefully settles its fiscal issues.
Shares of Akamai traded down 20 percent following this report, but we believe the selling was overdone. The Company has a unique monopoly in the Internet transmission industry, and we believe the shares are worth far more than they are currently trading. Akamai would make for a nice acquisition for any larger technology conglomerate. We believe the shares will trade up to $45 within the next 12 months.
Three-Month Chart
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